Eye on the News

Paul Howard

Bending the Health-Care Cost CurveUpward

The presidents efforts to fix health care are destined to make our problems worse.

November 18, 2009

Remember when President Obama said that the goal of health-care reform was to save money? The bill that passed the House a week and a half ago, according to the Senate Budget Committee, would cost a whopping $3 trillion after being fully implementedmore than three times the $900 billion that the president had promised. It turns out that Obamas oft-stated pledge that reform would bend the cost curve was accurate: the House bill would bend the curve straight up. Expect more of the same from the Senates version when Democrats bill in that chamber emerges, probably later todayearlier drafts came equally loaded with budget gimmicks, phantom cuts, and taxes on the middle class to go along with massive subsidies to the uninsured to buy government-mandated health plans. The Congressional Budget Office scored the cost of the coverage expansions in an earlier Senate version as rising at 8 percent annually. President Obama has repeatedly promised that health reform would lower costs, yet independent observers, from the CBO to Richard Foster, the chief actuary of the Centers for Medicare and Medicaid Services, have repeatedly said just the opposite. What gives?

Part of the reason is that whenever Washington micromanages markets, the pleasing of interest groups tends to take priority over good policy. (Republicans are no more immune to the temptation than Democrats: President Bush and congressional Republicans passed a drug benefit for Medicare without paying for it and without reforming the broader Medicare program.) Declaring victory requires greasing lots of palms, like those of California congressman Dennis Cardoza. Politico reports that Cardoza wheedled $500 million for rural medical centers (including a promise to fund one in his district) from Nancy Pelosi and the White House in return for his yes vote on the House bill.

Giving congressmen pork is surely expensive, but more costly still is the billions of dollars in subsidies that the bill would direct to the uninsured to buy government-approved (read: expensive) health insurance. The bill would also create over 100 new commissions, boards, and committees to dictate (among other things) what benefits and services your health insurance must coverincluding, by 2018, all employer-provided health insurance. Thats 100 new committees for lobbyists to jostle for handouts from Uncle Sam.

Meanwhile, Obamacare does almost nothing to control costs or fundamentally reform the governments massive Medicare and Medicaid entitlements. In fact, Foster estimates that 60 percent of the expansion of coverage in the House bill would come from new Medicaid enrollments. (The earlier Senate version did contain a tax on unions Cadillac health plans, a measure that might slow health-care inflation. But in deference to union complaints, Senate Majority Leader Harry Reid is likely to replace the tax with a new Medicare levy on upper-middle-class families.) When it comes to cost containment, Democrats tout the bills hundreds of billions of dollars in cuts to reimbursements for doctors, hospitals, and nursing homes. But these will undoubtedly be lobbied out of existence. Medicare doctor payments have been slated for deep cuts under a sustainable growth formula since 2003, but every year since then, Congress has voted to rescind those cuts. In fact, Reid already tried to pass just such an adjustment (for $200 billion) separately from the Senates health-reform bill, so that it wouldnt be scored as part of the bills cost. Thankfully, 12 Democrats and one independent voted with Republicans to kill the charade.

Democrats also rely on a super-committee thats supposed to pass more automatic changes to rein in Medicare spendingunless the president and Congress override it. Count on them to do so whenever its politically convenient.

In the end, the problem with Obamacare is that the president and his allies assume that the way to drive costs down is through price controls and committees, rather than market preferences. And thats an assumption that a centurys worth of failed statist experiments should have buried. Sure, markets arent perfect; businessmen cheat, lie, and steal, just as politicians do. But markets have one virtue over command-and-control systems: where competition, transparency, and consumer choice drive markets, bad actors go out of business, prices decline over time, and quality improves. If I want your business, I have to sell you something thats worth buying, and at a good price.

Health care, we are told repeatedly, is different. But its only different because the government has made it different. Our health-care system is based on an IRS ruling from World War II that confers tax-deductible status on health insurance only if its purchased through an employer. Health insurance is regulated in 50 separate sclerotic state marketsrather than in one big, truly competitive national onethanks to the 1945 McCarran-Ferguson Act. Medicare sets prices for thousands of physicians. Government decisions have transformed what could have been a price-lowering market like any other into an expensive, convoluted mess.

Such old systems are notoriously difficult to change. But they can change, and there are some promising templates. The Dutch are shifting from a command-and-control system to one in which insurers compete and prices for hospital care are allowed to fluctuate, driving innovation. Closer to home, in Indiana, nearly 50 percent of state employees have Health Savings Accountssaving taxpayers $42 million to date. Companies like Safeway and Whole Foods have created insurance plans that reward healthy behavior and lower health-care costs.

Neither Congress nor the president seems to be paying much attention. But until every American gets control of his or her own portable, affordable, private health insuranceuntil, that is, a true market exists in health carecosts will continue to spiral upward. And voters will get more of the same, packaged as hope and change.

Paul Howard is director of the Manhattan Institutes Center for Medical Progress.